FED ON DECK: Your complete preview of the week's big economic events

U.S.
Federal Reserve Chair Janet Yellen listens as U.S. President
Barack Obama holds a meeting with financial regulators to receive
an update on their progress in implementing Wall Street at the
White House in Washington March 7, 2016.REUTERS/Kevin Lamarque

On Tuesday, the Federal Reserve will kick off its two-day policy
meeting, culminating in its latest statement out at 2:00 p.m. ET
on Wednesday which will be followed by Fed Chair Janet Yellen
holding a roughly hour-long press conference starting at 2:30
p.m. ET.

Expectations are for the Fed to keep rates on hold. The market's
main focus, however, will be Yellen's press conference and any
indication given by the Chair on future action on interest rates
out of the world's most closely-watched central bank.

And while the Fed is the week's top story, unlike last week there
is a rush of economic data to keep investors and markets busy
with readings on retail sales, inflation, and multiple housing
market gauges set to cross the tape.

Top Stories

Mario Draghi fired his bazooka. The big story
last week was the
bold action taken by the European Central Bank to cut
rates, increase its asset-purchase program, and show a firm
commitment to supporting the European economy. The ECB took all
of its interest rates down, with its cut in the deposit rate to
-0.4% grabbing the most attention as the implications of
negative interest rates have been the dominant story in markets
over the last six weeks. Initially, markets acted the way you'd
expect after a big move from a central bank: the euro was
weaker, stocks were higher, bond yields were higher, but
comments from Draghi during his press conference that there
were no standing plans to cut rates reversed this trade.

Of course, this isn't exactly news, in a way, and certainly not
the kind of thing with a few days' hindsight that ought to have
triggered an outsized market reaction. (The euro, for example,
had one of its largest one-day swings in history, rising more
than 3% from its initial decline.) If the ECB had judged it
needed to cut rates further, it would have cut them on
Thursday. Nicholas Spiro at Lauressa Advisory in London
wrote Thursday that, "If the sole measure of success of
today’s crucial ECB meeting was a sharp decline in the euro
versus the dollar, then it can only be judged as a spectacular
failure." Whether or not this was Draghi's sole aim, of course,
is up for debate (and, frankly, probably unlikely).

The reaction in currency markets somewhat overlooked what, in
our view, was the biggest development to come out of this
announcement, which was an increase in the ECB's asset purchase
program to €80 billion per month which will also include
eligible corporate bonds in the coming quarter. The ECB had
already moved past strictly sovereign debt to include eligible
debt from regional governments, and so by including the
corporate sector makes a blunt commitment to encouraging
business lending in the euro area. To aid this program the ECB
also
announced a new refinancing program — called Targeted
Longer-Term Refinancing Operations, or TLTROs — that will allow
current lenders more balance sheet flexibility. Borrowing from
banks in this program will occur at the ECB's prevailing
refinancing rate — now 0% — and above certain thresholds occur
at the deposit rate, meaning institutions may be paid to borrow
money to refinance loans. The new TLTRO program, in short,
seems to be the ECB's way to calm market fears about what
negative interest rates do to the banking system. The big
winners, as this chart from Bank of America Merrill Lynch
shows, will likely be France and Germany.BAML

Economic Calendar

February Retail Sales
(Tues.): The February report on retail sales will be
released on Tuesday morning at 8:30 a.m. ET. Expectations are
the report will show sales declined 0.1% from the prior month
but rose 0.2% when excluding auto and gas sales. Retail sales
are reported in nominal dollars and so the decline in gas
prices seen during February will likely weigh on the headline
number. Ahead of the report, Wells Fargo economists said, "We
suspect a soft report will unfold with lower energy prices and
motor vehicle purchases weighing on the total sales figure, but
remain encouraged that consumer spending will continue to
support the U.S. economic expansion this year."

Producer Prices
(Tues.): The February report on producer prices, a
measure of inflation that tracks prices paid by producers, not
consumers, of goods, will also be released at 8:30 a.m. ET
Tuesday morning. Expectations are for the report to show prices
fell 0.2% from last month but rose 0.1% excluding the more
volatile costs of food and gas. Compared to last year prices
ex-food and gas should rise 1.2%, better than the 0.6% rise
seen in January.

Empire State
Manufacturing (Tues.): The March report on manufacturing
activity from the New York Federal Reserve should show a
continued contraction in activity. The index should hit -11.5,
better than last month's -16.6 but still indicating contraction
in manufacturing activity in the New York region. This report
is due out at 8:30 a.m. ET on Tuesday.

Homebuilder Sentiment
(Tues.): The National Association of Homebuilders'
latest housing market index should show an improvement this
month, rising to 59 from 58 in February. This report is due out
at 10:00 a.m. ET. Last
month's reading was a nine-month low for the index.

Housing Starts and
Building Permits (Weds.): The pace of housing starts
likely rose 4.6% in February to an annualized pace of 1.15
million while building permits likely fell 0.2% to an
annualized total of 1.2 million. The latest reading from the
Census will cross at 8:30 a.m. ET on Wednesday.

Consumer Price Index
(Weds.): February's report on consumer prices will cross
at 8:30 a.m. ET and should show a continued increase in price
inflation for consumer goods and services in the US. Excluding
the more volatile costs of food and gas, "core" inflation
should rise 0.2% over last month and 2.2% over last year in
February. Headline inflation, which includes food and gas
prices, should fall 0.2% compared to January and rise 0.9% over
last year. 'comment'

Industrial Production
(Weds.): The Federal Reserve's latest report on
industrial production and capacity utilization should show a
0.3% decline in production and a drop in capacity use to 76.9%
from 77.1%. January's report was skewed higher by an increase
in utility usage due to harsh winter weather. February's report
on industrial production is due out at 9:15 a.m. ET.

Federal Reserve
Interest Rate Decision (Weds.): The Federal Reserve's
latest interest rate announcement is due out at 2:00 p.m. ET on
Wednesday. Expectations are for the Fed to keep interest rates
pegged in a range of 0.25%-0.50%, putting the effective Fed
Funds rates right around 0.37%. Fed Chair Janet Yellen will
answer questions from the press for about an hour starting at
2:30 p.m. ET. Of interest during Yellen's press conference will
be any indications on if the Fed still remains intent on
multiple interest rate increases this year, as well as an
updated view on how the Fed views the evolution of inflation
pressures building in the economy.

"After tightening sharply by early February, financial
conditions have gradually eased. Equity markets both in the US
and abroad have started to rebound, the US dollar has
stabilized, credit spreads narrowed and volatility declined,'
writes Bank of America Merrill Lynch's Michael Hanson. "Several
Fed officials said that they hadn't changed their outlook on
the tighter financial conditions, but would monitor the
spillovers. That cautious position likely keeps the Fed
on hold in March; the question is whether they re-introduce a
balance of risks into the statement. While possible, we think
it more likely that they keep the current monitoring
language."

Philly Fed Business
Outlook (Thurs.): The latest reading on business
conditions from the Philadelphia Federal Reserve should show a
continued contraction in activity in March. The Philly Fed's
latest reading is expected to rise slightly to -1.7, a level
that still indicates falling activity in the region. This
report is due out at 8:30 a.m. ET on Thursday.

Initial Jobless
Claims (Thurs.): The latest weekly tally of initial
filings for unemployment insurance should remain near a
post-crisis of 266,000, a slight increase from the prior week's
259,000. This indicator has been among the clearest signs
showing that the US labor is still strong and, going forward,
will be closely watched for any signs that doom and gloom seen
in the economy by many in the investment community is actually
coming to pass in the real economy. Initial claims will cross
the wires at 8:30 a.m. ET on Thursday.

Job Openings and
Labor Turnover Survey (Thurs.): The January report on
job opening and labor turnover — typically referred to as the
JOLTS report — is due at 10:00 a.m. ET on Thursday. Job
openings should total 5.55 million, slightly down from December
5.61 million. More closely watched, however, than the headline
job openings number will be an updated reading on how many
Americans left their job last month. December's report showed
the
total number of quits hit the highest level in a decade, a
show of confidence from workers across the US labor
market.

University of
Michigan Consumer Sentiment (Fri.): The preliminary
reading on consumer sentiment in March from the University of
Michigan should show continued confidence from US households
during the early part of the month. The preliminary reading,
due out at 10:00 a.m. ET, should show the index rose to 92.2
from February's final reading of 91.7.

Market Commentary

It's all in your head.

The last couple decades of market commentary have seen the
conversation shift from one grounded in a belief that markets are
efficient and prices, in time, will give us the "right" answer to
one in which the irrationality of humans and the impact this
behavior has on asset prices rules the day.

See, for instance, a few headlines from this past week on BI:
Markets.

And you could argue that, well, of course there are going to be
stories on a news website that traffics in building narratives
around events and engaging readers on the banal ins and outs of
day-to-day markets and economics news.

But each of these stories is based on commentary made from
someone "inside the matrix," as it were. A strategist at a
research firm, an economists at a bank, and so on. The entire
complex — from the investors to the strategists to the media —
now pay significant attention to the story, the
idea, and very much distrust the belief that the market
will, in some sort of efficient manner, work out the "right"
price for some investment.

"Understanding the psychology of financial markets is important
for investors," writes Deutsche Bank's Torsten Sløk.

"The first step is to recognize that markets are driven by
stories. For example, will a company produce a great new product
that consumers want to buy? Will the forces holding inflation
down start to fade? Will low commodity prices have a negative
impact on emerging markets for many more years? Investors
should look at scenarios and evaluate whether markets are
assigning a too high probability to the some stories."

As for where this went wrong recently, Sløk writes, "The
stories we were telling each other in markets in January and
February involved wild exaggerations and the narrative was
heavily inspired by the 2008-2009 financial crisis. In
some sense, the financial crisis not only did damage to the
economy but it also had a big and permanent impact on investor
psychology."

This past week saw us pass the seven-year anniversary of the
post-crisis bottom. So the question is: where will we be in seven
years' time? And what will we fear? And what will seem silly? And
what, of course, will we wish we'd seen coming?